Axis sees tax-free bond gains

India’s new tax-free bond rules will boost sales of rupee-denominated notes to a record and improve inadequate infrastructure, Shikha Sharma (pictured)-led Axis Bank, the top debt arranger, has said.

Power Finance Corporation and five other firms extended offerings of such notes on March 15, a day after the government clarified rules to enable companies to invest in the asset class. Axis

Bank forecasts annual issuance of all local-currency corporate notes will exceed the previous high of Rs2.5 lakh crore ($46 billion) set in 2012, even after they fell 2.5% so far this year to Rs51,200 crore.

“The base of investors widens and that will be a big boost to issues getting fully sold,” Parthasarathi Mukherjee, president for treasury at Axis Bank in Mumbai, said in a phone interview on March 15. Infrastructure building is “not up to the mark”, he added. “Projects are stalled for various reasons so investors are asking for higher premiums to cover the risk.”

Prime Minister Manmohan Singh is seeking to double spending on public works projects to $1 trillion by 2017 to improve the quality of infrastructure ranked worse than Kazakhstan and Guatemala by the World Economic Forum. Five-year AAA rated corporate notes in India yield an average of 8.97% versus 4.79% for similar notes in China, according to data compiled by Bloomberg.

Locked Out
Infrastructure companies will use about 40% of their Rs60,000 crore ceiling for selling tax-exempt bonds in the year ending March 31, FM Palaniappan Chidambaram said last month. The Rs30,000 crore permitted was fully utilised the previous year, when such debt was first introduced.

Initial rules insisted companies only be allowed to buy debt with coupons above the Reserve Bank of India’s (RBI) bank rate, seeking to avoid artificially cheap cross-corporate deals. Companies were locked out of the market after the RBI boosted that rate by 350 basis points to 9.5% in February 2012, as part of a technical adjustment to its monetary policy tools.

The ministry of corporate affairs’ new ruling is that the coupon plus tax benefits must be higher than the RBI rate. Power Finance, Jawaharlal Nehru Port Trust, Rural Electrification Corporation, India Infrastructure Finance Co, National Housing Bank and Housing & Urban Development Corporation sold tax-free debt this month. National Housing, which targeted raising Rs5,000 crore from a sale of 10-year tax-free bonds, set a coupon rate of 6.82%, below the current bank rate of 8.5%. HDFC, the largest home loan company by market value, plans to sell Rs200 crore of notes due in a decade at 8.95%.

More Optimistic
The rate on the benchmark 8.15% government note due June 2022 rose two basis points to 7.92% on Wednesday, while the rupee was little changed at 54.3675 per dollar. Indian bonds due in a decade offer 599 basis points more than similar-maturity US treasuries.

“Borrowers can now be more optimistic their capital raising requirements will be met,” Ashish Sable, a Mumbai-based vice-president at SBI Capital Markets, said in a telephone interview on March 18. “The rule changes will make for more accurate price discovery.”

Chidambaram, in his Budget speech on February 28, set the limit for selling tax-free bonds in the coming fiscal year at Rs50,000 crore, based on recommendations made by the infrastructure companies.

Rate Cuts
Companies should buy bonds at current levels as rate cuts by the RBI could push down yields, said Madhav Nadkarni, the chief financial officer at Unity Infraprojects in Mumbai.